Bad Credit Bridging Loans; Your Questions Answered
Bridging finance was once a specialist product only offered by a handful of lenders, however the improved economic climate has led to bridging loans becoming more readily available and therefore an increasingly popular way to access funds quickly. Bridging loans, also known as bridging finance still cause confusion among many people and businesses so we thought it would be beneficial to explain the basics of what could be a very suitable finance option for your current situation. Today on the blog, we answer your questions and break down exactly what a bridging loan is, what it can be used for and how it works:
What is a bridging loan?
A bridging loan is a short-term funding option used to bridge the gap between debt coming out and the main line of credit becoming available. Most bridging loans are taken out over 12 months or less and must be secured against an asset, usually your property. The reason for their increased popularity is that the funds that can be accessed quickly; in many cases the customer will receive the funds in their bank account within 48 hours of loan approval and paperwork being completed. Each bridging loan application is assessed individually to ensure the customers suitability for this type of finance. The majority of bridging loans range from £30,000 up to large commercial loans of several million pounds.
There are two types of bridging loans; a closed bridging loan and an open bridging loan. In simple terms, a closed loan has a set repayment date and an open loan doesn’t. With an open bridging loan, payment is still expected before the loan period ends.
What is a bridging loan used for?
A bad credit bridging loan can be used for a wide variety of reasons. The most common use is in facilitating a property purchase before the owner has sold their current property. Other common uses are to help someone planning to sell-on quickly after renovating a home, or to help someone buy a property at auction.
How does a bridging loan work?
When you obtain a bridging loan, the lender usually finances the purchase of the new property, as well as taking on the mortgage of your existing property. The total amount borrowed is known as the ‘peak debt’ and is calculated by adding the amount outstanding on your existing mortgage to the value of the new property. The likely sale price of the existing property is then subtracted and you’re left with the ‘ongoing balance’ which will be the overall balance of your new loan.
Are bridging loans available to people with bad credit?
Applying for any type of loan will almost always involve a credit check of some description. Many people believe that if they have a chequered credit history they won’t be accepted for any form of credit, and whilst this may be true for mortgages, personal loans and credit cards, it’s not necessarily the case for a bridging loan.
The reason that bridging loan companies are more flexible is because they are more concerned about the value of the asset used as security for the loan. This gives them the protection that in the event the loan is isn’t repaid, the asset can be sold to provide the repayment funds.
Would a bridging loan be available for my business?
Absolutely, bridging loans are available to individuals and businesses. Perhaps your business has been hit by an unexpected cash flow issue or you need to move to bigger premises, whatever your reason for borrowing, bad credit bridging finance could be a good option to get the money fast.
What is an exit strategy and why do I need one?
A clear exit strategy is crucial for bridging finance. Because a bridging loan is only arranged on a short term basis it is imperative that a realistic exit route is in place from the outset. Most commonly, this would be the sale of a property that is more than the total cost of the loan.
In some cases a strong exit strategy is more important than the borrower’s credit score. For example, if the borrower’s exit strategy is the sale of a property then someone with a poor credit score could still get a Bridging loan. However, if their strategy was to remortgage, it’s unlikely they would get approved for a remortgage therefore their exit strategy would be less credible, which means the borrower would not be approved for bridging finance.
What risks should I be aware of?
It should be noted that the interest is compounded monthly, which means that the longer it takes to sell your property, the more interest that will accrue. You will also need to check the bridging period, which is usually six months for purchasing an existing property and 12 months for a new property, as lenders can charge a higher interest rate if you don’t sell your property within this time frame.
Is a bridging loan my only option?
Absolutely not, and according to experts it should not be your first port of call either. It is important that you explore all options available to you before you jump into a bridging loan. In some cases it can be cheaper to take out a high loan-to-value mortgage, a secured loan or a let to buy mortgage. Our recommendation would be to speak to a loan advisor who will take the time to explore your options with you in order to find the correct finance product for your situation.